What You May Not Know About China

I’m not a trained economist, so when I want to understand what is really happening in China’s economy, I always turn to others who are. My “go to” guy in this regard, by a wide margin, is Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets. I have known Andy for a long time. He is smart and sensible, lives in Shanghai, so he is not commenting on China from afar, and bases his conclusions on his own on the ground research.

Andy recently issued a Special Report titled: “Misunderstanding China” in which he “debunks” 16 popular Western illusions about the country. It’s a great piece, which unfortunately is only available to CLSA clients, but if you can get your hands on a copy, it’s well worth reading.

In the report, Andy cites some very interesting, little known facts about China and its economy. Did you know that:

Exports

Net exports accounted for 8.8 percent of China’s GDP in 2007, but fell to only 4 percent in 2010.

The Currency

According to the Bank for International Settlements, the yuan appreciated 32 percent on a real basis between January 2005 and March 2012.

The Peterson Institute for International Economics has said that a ratio of China’s Current Account Balance to GDP of plus or minus 3 percent would reflect a “fundamental equilibrium exchange rate.” Treasury Secretary Geithner has said that a 4 percent ratio is a “benchmark for the future.”

China’s Current Account Surplus to GDP ratio fell last year to 2.8 percent from its 2007 peak of 10.6 percent. In the first quarter, it was 1.4 percent.

Trade With The United States

88.5 percent of consumer spending in the United States is on items made in the U.S., because services, which account for two-thirds of spending, are mainly produced locally.

In 2010, imports were about 16 percent of US GDP, while imports from China amounted to 2.5 percent.

Last year, the Personal Computing Industry Center (PCIC) of the University of California, Irvine took apart an iPad and worked out its value chain. After stripping out Apple’s 30 percent profit, amounts paid to suppliers from Taiwan, Japan and other non-China suppliers of batteries and touchscreens, only about $10 is paid to Chinese workers to assemble the product in China. While each unit sold in the United States adds from $229 to $275 to the trade deficit between the United States and China, only a tiny portion of that amount is retained in China’s economy.

A research note published last summer by the San Francisco Fed concluded that less than one-half the amount of purchases from China reflect the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling and marketing goods carrying the “Made in China” label.

China is by far the fastest growing market for American goods. Between 2000 and 2011, U.S. exports to China rose 542 percent, while its exports to the rest of the world rose by only 81 percent during that period.

Role of State-Owned Enterprises in China’s Economy

In 1958, 86% of urban workers in China were employed by state-owned firms.

Between 1995 and 2001, the Communist Party laid off 46 million state-sector workers — equal to sacking the entire combined workforces of France and Italy in six years. As a result, the state’s share of urban employment fell to 28 percent in 2002, and now stands at 19 percent.

Between 2005 and 2010, almost all new job creation in China came from private companies. Employment at state firms rose by only 0.1 percent per year while employment at private firms rose by 6.2 percent annually during the period.

China’s Housing Market

In the 1980s, over 80 percent of urban housing in China was publicly owned and rented to workers for a nominal fee by government agencies and state-owned companies.

Beginning in 1998, many state workers were allowed to buy their flats at steep discounts to market value, resulting in the largest one-time transfer of wealth in the history of the world, as most of China’s urban-housing stock was handed over to its occupants.

In March, 93 percent of new homebuyers in China were owner-occupiers, not investors.

Over 80 percent of urban housing is privately-owned in China today.

Labor Competitiveness

China has the highest labor productivity growth rate of all the major economies in the world.

China’s industrial value-added rose by 13.4 percent annually in real terms between 1997 and 2010, while real manufacturing wages rose by an average of only 11.2 percent.